Overnight Summary: Same Confusion, Different Day

Once again confusion is rife overnight, following yesterday's main European event, Spain's first "mixed" regional election, which saw Rajoy's PP party in his home state of Galicia eeking a majority by a few seats, offset by wins for nationalist parties in the Basque Country. The immediate read here is that the Galician win is an endorsement of Rajoy's "austerity poilicies" and thus EUR positive (which have yet to be actually implemented as Spanish spending continues to rise, as tax revenues continue to drop), yet it makes the likelihood that Spain requests a bailout before the Spanish regional election on November 25, which is about secession, virtually nil, and thus SPGB negative. Furthermore as Bank of America points out "some euro-area govts may remain reluctant to support Spain’s request as long as yields continue to be low, banks haven’t been recapitalized; probably reinforced by Catalonia elections" but that is a reality tale for another day - the "market" can only handle so much.

Elsewhere, confirming that Japan's economy has resumed tanking is Reuters October manufacturing Tankan index, which printed at -17, down from -5 in September, and the worst print since before Fukushima. And this is 8 iterations of QE in. Per Reuters: "The monthly poll, which closely correlates with the Bank of Japan's quarterly tankan and economic growth trends, highlighted deepening pessimism in the world's third-largest economy." Oh well, there is always QE 9 any minute now.

Finally, in a perfectly expected recap of last week's biggest event in Europe, Moody's just confirmed our mockery of this latest epic non-event, and said that "lack of progress at Friday's EU Summit on a proposed EU banking union is a credit negative for weaker members of the euro zone."  Moody's noted that at the meeting, the leaders committed only to agreeing the "legislative framework" for the proposal before the end of 2012. "However, stark disagreements were apparent in many officials' post-summit announcements regarding the design, desirability, and implications of this potential mechanism", Moody's noted. A "credit negative" event for the same Spain that Moody's just days prior decided not to downgrade to junk status. And one wonders why nobody takes either Europe or Moody's seriously.

In FX trading news, the EURUSD has seen its now traditional BIS-inspired dose of upside exuberance in overnight trading, set to fizzle shortly.  From SocGen:

EUR/USD 1.3012-1.3066 overnight range. Relief greeted the Galicia election outcome and has given EUR/G10 a lift. EUR/USD bounced off Friday's 1.3013 low with the 1mth RR rallying to -0.27. Liikanen/Nowotny scheduled to speak today.


USD/JPY 79.22-79.67 overnight range. Clean break of the 200d ma at 79.43 propels spot over 79.50 for the first time in two months. Weak exports data and BoJ's Shirakawa comments help to weaken JPY. EUR/JPY resistance 104.50/83.


GBP/USD 1.5991-1.6041 overnight range. Some signs of relief buying from Friday's collapse below 1.60 but the chart does not look constructive for further gains. Caution warranted ahead of Q3 GDP data on Thursday. EUR/GBP motoring higher.


AUD/USD 1.0302-1.0332 overnight range. Rebound mitigated by the RBA comments overnight about wanting to see a weaker AUD. Support 1.0302 and 1.0255 below, resistance 1.0345. EUR/AUD resistance 1.2700/31. Q3 CPI on Wednesday.

On the quiet docket today, which will be spent by pundits contemplating today's final Obama-Romney foreign policy-focused debate:

The regional election in Galicia yesterday brought relief for the Rajoy government (PP traditionally weakest in Basque country) and set a positive tone for EUR/G10 overnight, helping the single currency to consolidate its position and in some cases build gains despite the frustratingly slow progress in EU policy matters. Though net short EUR positions continue to decline (see IMM chart), EUR/USD is still locked in a six-week range (1.2804-1.3172) and niggling uncertainty about Spain and Greece may contribute to lacklustre conditions over the coming days.

The focus will be on the FOMC on Wednesday and eurozone data for signs that business conditions are stabilising in early Q4. The picture is looking somewhat more promising for crosses like EUR/GBP and EUR/JPY only because of further easing prospects in the UK or Japan, and the resilience of risk assets more generally this month (though mindful of Friday's negative close). Uncertainty over budget discipline in Greece and financing conditions in Spain will continue to test market confidence and Moody's warning of the implications for sovereign creditworthiness because of ongoing dissonance among EU leaders on a banking union will be viewed overseas with scepticism that the EUR bounce since the summer can last.

A quiet day today features no first-tier data but includes speeches by ECB members Liikanen and Nowotny

And a comprehensive summary narrative of all things notable, as usual from DB's Jim Reid:

The main risk event over the weekend was the Spanish regional elections as Galicia and the Basque Country went to the polls on Sunday. With the central government relying on the cooperation of the regions in its fiscal consolidation efforts, the media had hyped the election in Galicia (which happens to be Rajoy’s home region) as a “pseudo-referendum” on the Spanish government’s austerity and reform programs. Early poll results show Rajoy’s People’s Party not only retaining its majority in Galicia, but managing to increase its absolute majority by three seats to 41 out of 75 in the region’s parliament (FT). Opinion polls before the vote had indicated the PP would win 39 or fewer seats (Reuters), so the result is probably a mild positive for Rajoy’s agenda and for markets in general. The rival Socialist Workers Party’s share of seats dropped to 18 from 25.

Meanwhile, results in the Basque Country were less favourable for Rajoy. The moderate Basque Nationalist Party (which has ruled the region for 26 of the past 32 years) won 27 seats out of 75, bringing to an end to three years of rule by the Socialists (who took 16 seats). The pro-independence Bildu party took 21 seats (from zero previously) while the PP lost 3 seats to hold 10, although the PP has historically been the weakest party in the region. It is not yet clear who the Basque Nationalist Party will team with to form a government but Reuters is reporting that the nationalists may prefer to form a coalition with the Socialist Party rather than with Bildu, a separatist party previously banned from running by Spain’s constitutional court for its association with the armed separatist group Eta (FT).

With no large swing away from the PP, the weekend’s results probably make it easier for Rajoy to ask for a MoU – although snap elections in the wealthier and more populous Catalonia region on November 25th, seen as a potential vote for greater economic independence from the central government, is a key risk to this view.

So we’ll be watching Rajoy this week although Spain seems to be fading from view as a big macro driver for the time being. There is however plenty going on elsewhere.

Overnight markets are trading lower, not helped by the weak US lead from Friday. The Shanghai Composite (-0.4%) and KOSPI (-0.75%) are leading the losses, while the Hang Seng (+0.1%) is bucking the regional trend ahead of a key earnings announcement from indexheavyweight China Mobile today. Weekend headlines are also weighing on sentiment after Merkel ruled out retroactive direct bank recaps ahead of the establishment of a single supervisory mechanism (SSM) in 2014 and French President Hollande said that there was no discussion of Spanish aid at last week’s EU Summit. Asian (+3bp) and Australian (+4bp) benchmark credit indices are trading wider for the second consecutive session.

Overall it’s been a bit of a strange few days for markets. On Wednesday evening the S&P 500 was flirting with its post-QE3 highs only to fall to close to its post QE3 lows by the end of Friday after a -1.66% drop – the most since June 21st. It also dropped the index below its 50 day moving average for the first time since June 28th. It was a week where Financials (+1.95%) led the way and IT slumped (-2.4%) after Google (-8.4%) and Microsoft (-1.9%) disappointed. Interestingly Apple is down 13.1% from its September 19th peak which equates to $86.4bn of market cap being wiped off – equivalent to about 10% of the market cap of France’s CAC40 or 21% of Spain’s IBEX index.

Earnings season has certainly caused some of the divergent performance in what has been a mixed bag for the US so far. As we highlighted last week, the strong earnings beat performance versus the disappointing revenue performance has been the ongoing theme for the US reporting season to date. As of last Friday our count shows that 70% of the 96 S&P 500 firms reporting since October 1st, have so far exceeded analysts’ expectations although only 40% managed to beat top line estimates. We still have few weeks to go before  we can firmly conclude but it does look like we are headed towards the second consecutive quarter where companies managed to eke out earnings performance despite sales weakness. Indeed the Q2 beat:miss ratio wasn’t all that different to the current run rate at 69%:30% (1% in line) for EPS and 41%:59% for revenue. It is still fairly early days for the European reporting season but so far the trend is almost exactly the opposite with a beat:miss ratio of 50%:50% for EPS but a much stronger 62%:38% for sales.

Taking a closer look at the US performance by sectors, the strongest earnings beats have come from Health Care, Consumer Services and Financials with over 80% beats. The weak revenue performance is fairly consistent across the board. Indeed Financials aside all the major sectors are pretty much running at a miss ratio of over 50%. The misfiring IT sector has seen only 56% beats on EPS with the number dipping to 44% on revenues. This week we have 160 S&P 500 companies reporting together with 89 from the Stoxx 600 so plenty of new information to add. The main ones to watch in the US are Caterpillar (Monday), UPS (Tuesday), Facebook (Tuesday), Apple, ConocoPhilips and Procter & Gamble (all Thursday). In Europe, earnings of note include Philips Electronics (Monday), KPN (Tuesday), Volkswagen (Wednesday), Credit Suisse and Unilever (both Thursday).

Elsewhere this week the key events include the release of the preliminary/flash global PMIs, the final US Presidential debate and the first post QE3 FOMC meeting. The flash PMIs which will be a key gauge of sentiment after the central bank actions of September. The market is expecting a 0.4ppt and 0.3ppt improvement in the Eurozone manufacturing and services PMIs respectively (to 46.5 and 46.4), driven by better readings from France and Germany. Also on Wednesday, the Markit preliminary PMI for the US is due (market expecting no change at 51.5) while in China, we get the HSBC flash manufacturing PMI.

Before this, today’s final US Presidential debate (9pm USEST) focuses on foreign policy so all eyes on the overall outcome before Europe opens tomorrow. The debate takes on additional significance with a weekend WSJ/NBC News poll suggesting a dead heat between Obama and Romney. This reminds us that it was 12 years ago we had the hanging chads saga. Time flies. The debate will be followed later in the week by the FOMC meeting on Tues-Wed. There will be no post-FOMC press conference with Chairman Bernanke this time around and our economists expect no new policy announcements given the proximity to the November elections. Apple is expected to unveil its iPad-mini on Tuesday and I for one will be casting a watchful eye over the new device, working out how I can justify it being essential for my day to  day life. Key US economic data releases include new home sales (consensus: 385k), pending home sales (cons: +2.5%), durable goods orders (cons: +7%) and Q3 GDP (cons: +1.8%).

Back in Europe, Mario Draghi briefs members of the Bundestag on Wednesday in an effort to build greater consensus amongst German lawmakers for the ECB’s OMT programme. The UK’s Parliamentary Commission on Banking Standards will be taking evidence from ECB governing council member Erkki Liikanen on the topic of financial sector reform today (scheduled for 2:30pm London). Aside from Wednesday’s PMIs, other notable European data releases throughout the week include German IFO expectations (Wednesday), Euro Zone consumer confidence (Wednesday), Eurozone money supply (Thursday) and 3Q UK GDP (Thursday).


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